How much money will you need in retirement?

Retirement.  It’s a stage in life that we’ve all dreamed about at one time or another, but how many of us are actually saving the right amount of money and know exactly how much we need to make this dream become a reality?  Many people conveniently choose to save the percentage up to which their employer matches in their 401(k) (oftentimes 6%), but will this amount be enough?  Saving in your employer’s 401(k) is a great start, but is this retirement savings vehicle sufficient to generate a rate of return that is in line with your risk tolerance and nest egg goal? 

Let’s assume you are 40 years old, earn $120,000 a year, and have saved $250,000 in your retirement accounts up to this point.  Assuming that you want to retire at age 65 with the same standard of living and with a considerable nest egg so that you do not run out of money in retirement, you will need to have a nest egg of approximately $5,675,000*.  Taking into consideration inflation and assuming you withdraw only the interest you potentially earn on your accounts, you will need to save approximately $50,200 each year for the next 25 years to reach this goal.  Note that this is far more than the amount which is matched in your employer’s 401(k).

If you’re not willing to push retirement past 65 and aren’t willing or can’t save the amount of money necessary, you could increase your investment risk for greater potential returns (but potentially lose more money along the way as well) or choose to live your retirement years at a standard of living less than your current one.  While people may claim that they can live off of less money later because they will have no mortgage and no kids to support, the reality is that other costs will probably come into play such as health care, long term care, and even assistance to other family members (ie parents, siblings, or even children)! 

To throw some realistic complications into the picture, what if you are sidetracked through a disability or critical illness such as a heart attack or stroke?  Imagine if you weren’t able to put that money away into your 401(k) or other savings account earmarked for retirement.  This could set you even further back from your retirement goal!  Stay tuned for a future blog about protecting the money you’ve worked so hard at accumulating or contact me to discuss how it can pertain to your personal situation.